Urban Office Momentum

The U.S. office market has shifted its geographic momentum this year, with central business districts (CBDs) and popular urban corridors recovering better than suburban markets. One significant sign of the improving health of CBDs has been a notable increase in corporations migrating from outlying suburbs to downtown or urban locations.

So far this year, major suburban-to-urban office relocations have been announced or are being contemplated in such varied markets as Chicago, Detroit, and Las Vegas, among other places.

In Detroit, Blue Cross Blue Shield of Michigan is moving 3,000 workers from suburban Southfield into a downtown office tower. In Las Vegas, online retailer Zappos.com announced it will relocate its headquarters from suburban Henderson to a renovated downtown building. In Chicago, a medical center alliance known as UHC moved downtown from suburban Oak Brook this summer, and Sara Lee—which moved to the suburbs just five years ago—is the latest headquarters company to consider moving back downtown, according to news reports.

In addition, scores of companies are choosing to expand in downtowns rather than follow the longstanding, so-called job sprawl migration to the suburbs. In Dallas, technology firm General Datatech announced it would retrofit an old downtown building rather than pursue the less-expensive option of building on a suburban greenfield site.

And in some cases, the movement to urban settings even extends to denser, walkable, urban-style suburbs. In Boston, biotech company Biogen Idec Inc. announced it will abandon the outer suburban research campus it opened just a year ago and move back to the inner suburb of Cambridge.

“There’s definitely a renaissance in urbanity, and it applies both to downtowns and denser suburban nodes. It really is both,” says Michael Dardick, president of the Granite Properties investment and management firm in Dallas and vice chairman of ULI’s Industrial and Office Park Development Council (Gold Flight).

The strengthening of central business districts and urban settings involves the convergence of a few financial and societal trends, according to real estate experts. Corporations are consolidating offices and shedding surplus space to achieve cost savings. New or renovated downtown Class A buildings tend to offer larger footprints and better interior designs, such as more open layouts, than suburban campuses. Perhaps most important, companies, especially in tech-related industries, are recruiting and targeting the next generation of talented workers, the generation Y/millennials 17 to 34 years old who increasingly prefer urban lifestyles with mass transit.

“This is a real trend, and it’s driven by the best way to recruit the millennials,” says Doug Poutasse, executive vice president for strategy and research for commercial real estate advisory firm Bentall Kennedy in Boston and immediate past chairman of ULI’s Industrial and Office Park Development Council (Silver Flight). “That labor pool is now an urban labor pool, and firms need to be where the labor is. In firms specializing in intellectual capital, the employees don’t want to work out in suburbia.”

The comeback of the CBD office market was most evident in the second quarter, which produced the greatest quarterly absorption of space since 2007, according to real estate consulting firm Jones Lang LaSalle. CBDs absorbed more net square footage than did the suburban markets tracked by the firm; the vacancy gap widened between the two areas, with overall CBD vacancy dropping to 15.0 percent, compared with 20.0 percent for the suburbs. Also, average CBD rents have risen this year while average suburban rents have remained flat.

Furthermore, improving conditions for CBDs spread to metropolitan areas beyond stalwarts New York City and Washington D.C., with 71 percent of CBDs showing positive absorption through the first half of this year, compared with less than half of CBDs last year. CBDs showing a turnaround include Cincinnati, Detroit, Houston, Philadelphia, and Tampa. Jones Lang LaSalle’s first-half 2011 office market report noted that “flight from outdated, isolated suburban campuses to core urban areas continues.”

Still, plenty of suburban markets are improving, too—two-thirds of the suburban sectors tracked by Jones Lang LaSalle have produced net absorption so far this year—and plenty of companies continue moving from one suburb to another, farther out. But “it’s hard to find examples of companies moving from downtowns to the suburbs,” says Andrew Friedman, chairman of ULI’s Industrial and Office Park Development Council (Blue Flight) and a managing director at San Francisco–based Shorenstein Properties, which owns and manages office properties in major metro areas.

The office market is considered a lagging indicator, so the summer slump in the economy could put a chill in office space demand and the urban office recovery. Nevertheless, Granite’s Dardick says, “I don’t think [the urban recovery] is primarily about economic conditions. This is a larger, broader trend of demographics and sustainability that will continue.”

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